Set Your Innovation Teams on the Right Path

One of the most critical challenges facing growth-seeking executives in large companies is deciding what constraints they should be placing on their organizations’ innovation efforts. Unconstrained efforts of the “let 1,000 flowers bloom” variety feel good, but often lead to diffused progress. On the other hand, incorrectly constrained innovation efforts carry well-documented risks. Companies that set the wrong boundaries leave themselves vulnerable to disruptive, game-changing start-ups. What kinds of constraints spur innovation and which ones kill it? Generally, we suggest that companies impose two key constraints. First, identify a handful of promising markets (that is, no more than five) where some change in technology or consumer behavior now makes it possible to bring to bear a unique corporate capability to address some previously unaddressed need. That sounds challenging, and it is. High-potential markets tend not to be obvious. Relying on historical market data to discover them won’t work, since that tells you about yesterday’s markets, not tomorrow’s.

So preparing that short list can require an investment in detailed ethnographic research, field visits to early-stage start-up companies or emerging markets, and numerous working sessions where a small team debates the implications of the research findings and formulates hypotheses about how to move forward. Second, define the financial parameters to which ideas must adhere. Companies typically spend a lot of time developing financial forecasts of proposed innovations and debating the implications of their analysis. That can be a big waste of time. Forecasts are nothing but the mathematical relationships between made-up numbers. Instead, give your innovators general financial goals. What sort of revenue does an idea need to generate when it is mature? How much money is the company prepared to lose before the opportunity is realized, and for how long? What kind of margins does the offering have to provide? Set these guidelines carefully. New growth businesses generally take longer to mature than even the most optimistic projections. Focusing too single-mindedly on gross margins can blind companies to potentially lucrative innovations that make money in different ways from their mainstream business. Consider focusing on net margins instead of gross margins, allowing the team the freedom to introduce different business models.

Or explicitly allow the team to accept lower gross margins in a deliberate effort to pursue disruptive innovation. Setting clear financial guidelines avoids wasting time on ideas that are sure to get killed when they don’t meet them. And pushing innovation teams to clarify what has to happen in order to reach those targets helps them identify critical assumptions that must be validated before making significant investments Companies may also want to consider a host of other constructive constraints, such as focusing on specific geographies, considering only ideas that can be built organically rather than through large acquisitions, or zeroing in on a specific set of the company’s portfolio of products or brands. These might limit your options, but they too may also spur creative thinking, and save your team from wasting time pursuing an option that management will in any event never accept. That said, there are three specific options a company should not take off the table, no matter how much executives might want to (and precisely because executives so often do want to). The first is the possibility of competing against what a company currently sells. The very word cannibalization is treated as an expletive in many corporate halls. Certainly, all things being equal, you would prefer to take someone else’s business away than your own. But the process of creative destruction inevitably involves at least some cannibalization. And like it or not, if you can dream up something that will cannibalize your business, competitors will eventually, too. The second is refusing to consider anything that performs less effectively than what you currently sell. Companies often dismiss a disruptive alternative as inferior.

Remember how Western Union famously dismissed Bell’s telephone as an “electrical toy” because it could only send voice signals over a few miles? Or how Sony scoffed at portable music players with inferior sound quality? Disruptive solutions actually aren’t worse. They are just different. A disruptor successfully trades off pure performance for some other advantage of convenience, simplicity, or affordability. Market demands can change quickly, and companies that shut themselves off from competing on those bases are often left behind. Finally, avoid constraining anything that involves building or using a different channel to market. It’s natural, for instance, for consumer goods companies to think in terms of existing retailers or for companies that sell to large enterprises to want to tap their large direct sales forces. But disruptive ideas hardly ever come to market through current channels. Newspaper companies that tried to use their existing advertising sales force to sell digital advertising, for example, encountered immense challenges. Despite resource advantages, large companies often struggle to keep up with start-ups that don’t have to worry about many of these constraints. Improper attention to constraints leads teams to waste time on ideas that are destined to be shut down anyway and avoid disruptive ideas that have the greatest chance of creating long-lasting impact. But applied wisely, constraints up the chances of corporate success.